Hedge-Fund Managers Can Pass Up a Look Down Under

The nation’s 23 million people can be very touchy about
references to the yellow fruit. Many still seethe over a warning
by Paul Keating, prime minister from 1991 to 1996, that
Australia risked becoming a banana republic. His fear: the
economy might become perilously reliant on exports, leaving
living standards vulnerable and volatile.

Few economists harbor such fears today. Australia has been
an unambiguous hero of the post-Lehman Brothers world, boasting
average growth of 3 percent during the past 10 years as the
U.S., Europe and Japan either retreat or endure middling growth.
It’s enough to make a hedge-fund manager searching for the next
Greece look elsewhere.

Yet there is one developing-nation dynamic that warrants
concern: The Australian government is browbeating the central
bank into making decisions that might compromise stable growth
for the $925 billion economy. How Governor Glenn Stevens
responds will offer important clues about the state of central-
bank independence.

Australians have many valid gripes: Housing prices are
still too high; Chinese demand for resources is creating a two-
speed economy between mining cities and others; infrastructure
is crumbling; high taxes leave the nation uncompetitive;
education requires an overhaul; and politics have become too
toxic for change to have a shot.

Boom-Bust Cycles

Yet political pressure on the Reserve Bank of Australia to
cut interest rates won’t solve any of these problems. Instead,
it may leave Australia more susceptible to the boom-bust cycles
that Keating warned of years ago while serving as treasurer. As
we’ve seen in Group of Seven economies such as Japan, lowering
rates too much takes the onus off government to do its job and
hinders needed change.

That gets us back to the bananas. Investors expect Stevens
to preside over a rate cut when the central bank board meets May
1. Trading in inflation-linked bonds suggests additional moves
may follow if consumer prices stay in the central bank’s 2
percent to 3 percent target. (Core inflation rose at a 2.2
percent annual rate last quarter.) Given the dire state of the
world, deflation is as big a threat globally as inflation.

In a quirky story last week, Bloomberg News offered a hint
of Stevens’s own worldview. For years, he bought his daily
banana at the Fruity Blooms food stall across from the central
bank’s headquarters in Sydney. He stayed away after banana
prices last year rose as high as A$3 ($3.10) each, but returned
in the past three months as they returned to A$1.

Cash Registers

One shouldn’t overplay a single anecdote to convey the
intricacies of monetary economics. Unlike most advanced nations,
which publish inflation figures monthly, Australia’s are
released quarterly. That complicates the RBA’s task. But because
of the dearth of data, personal experiences at the cash register
take on greater weight.

No matter what inflation really is, Prime Minister Julia Gillard should refrain from pressing Stevens into acting. The
idea of central-bank independence is becoming quaint if not
antiquated. The Federal Reserve and European Central Bank joined
the Bank of Japan in pushing down rates to bail out dithering
politicians. Will Australia’s central bank, one prized for
dogged autonomy, be next?

Although Gillard has couched most of her statements on the
central bank with phrases such as “if it chooses to” and
“should the RBA consider it appropriate,” her intentions are
pretty clear. “There is plenty of room for the RBA to move
further if need be,” she said in an interview last week. That
leaves little doubt about her desire for a more compliant
monetary strategy.

Thin Legacy

Lower rates certainly would be a short-term boon for
homeowners, who are among the most indebted anywhere; about 90
percent of them have variable-rate mortgages.

Much of the criticism of Gillard is justifiable. So far, it
isn’t clear that she can fulfill her duty to leave the nation
better off than when she came into office two years ago.

She hasn’t, however, been the disaster that opponents and
pundits claim. She’s no worse than her predecessor, Kevin Rudd,
who was no policy dynamo. And John Howard, prime minister from
1996 to 2007, was better at riding China’s coattails than making
tough decisions.

When you consider globalization’s biggest challenges,
Australia is subject to all of them: a widening gap between rich
and poor; the effects of climate change; unappealing choices
posed by immigration; and waning productivity. Gillard hasn’t
done much to address these impediments to the outlook.

Surplus Obsession

She also feeds into the national obsession with returning
to budget surpluses, pursuing a fiscal policy that would be
anything but constructive in today’s world. Australia failed to
create a sovereign wealth fund to help save for a rainy day.
Efforts to tax the exorbitant profits of mining companies fell
flat. If China crashes, Australia will spend years explaining
why it hasn’t done either.

In the meantime, the goal of achieving a budget surplus has
become an ideology all its own. In a world in which credit-
rating companies are downgrading the U.S. and France, Australia
has little to worry about. It shouldn’t flinch at making the
investments that will leave the economy better off decades from
now.

Gillard’s surplus ambitions have her leaning on Stevens to
ease so she can tighten the fiscal side of the ledger. Haven’t
we seen the downside of this mix before? The U.S. is still
shaking off the bubbles inflated during Fed Chairman Alan Greenspan’s tenure. Australia should think long and hard about
the unintended consequences of easy money.

(William Pesek is a Bloomberg View columnist. The opinions
expressed are his own.)